The taxman has bowed to pressure from tax advisers to scrap a piece of controversial wording in the 2007 finance bill that would have freed up HM Revenue & Customs to enforce penalties without having to rely on objective evidence.

Following a period of intense consultation, HMRC announced last week that it would remove the phrase ‘HMRC thinks’ from the bill when used to refer to a breach of tax rules or as a trigger for penalties.

The phrase was mentioned 19 times in the original draft legislation but has now been scrapped after advisers and taxpayers expressed fears that the wording would allow HMRC to issue penalties on a whim, without having to back up its decision with evidence.

‘Dropping the “HMRC thinks” words, so that penalty decisions continue to be based on fact rather than opinion, is sensible and welcome. The proposed use of such wording as a basis for levying penalties seemed loose, arbitrary and inappropriate,’ said Pricewaterhouse- Coopers tax partner John Whiting.

Advisers concerned about the ‘HMRC thinks’ phrase will now turn their attention to the consultation on the extension of the disclosure regime, which was launched after the 2006 pre-Budget report.

Concerns have been raised that proposed changes to the regime, much like the ‘HMRC thinks’ phrase, will also allow HMRC to make ad hoc decisions without having to refer to relevant evidence or legislation.

The proposed changes will see HMRC begin to audit disclosure regime compliance. To obtain a clean audit, advisers will have to show compliance with HMRC disclosure regime guidance.

The fear is that HMRC can change disclosure regime guidance at any time but still require advisers to take account of the change.

This will allow HMRC to give any announcement the force of law without having to introduce actual legislation through parliament.